Corporate Personality

The verdict in the landmark case of Salomon vs. Salomon and Co. Ltd. has justified this
characteristic of a corporate personality of a company.
Mr Aron Salomon was a leather boot and shoe maker and had a flourishing business, which he later
turned into a company with limited liability. He himself, his wife and five eldest children became
shareholders of the company and the two eldest sons became directors. The company also gave
10,000 in debentures in the return of the loan given by him to the company. Soon after the
company was incorporated, the business started declining due to numerous strikes and its after
effects, due to which the company incurred severe losses. In order to save his sinking business Mr
Salomon assigned his debentures, but the efforts went in vain. On failure in paying the interests in
time, the debenture holders sued to enforce their security, and thereafter the company was put
into liquidation. The debenture holders claimed that the shareholders of the company were
dummies and that the company was just an alias, an agent of Mr Salomon. This view of the
debenture holders was upheld by the High Court of the United Kingdom as well as the Court of
Appeal. They ordered Mr Salomon to indemnify the company. Also, it was accused that the
incorporation of business by Mr Salomon was merely a scheme to enable him to carry on his
business as before but with limited liability. However, the House of Lords unanimously overturned
the decisions. They held that the Act under which the company was registered had nothing about
whether the shareholders should be independent of the majority shareholder.
The company was duly constituted under the law and the Lordships of the House observed that:
When the memorandum is duly signed and registered, though there be only seven shares taken,
the subscribers are a body corporate capable forthwith of exercising all the functions of an
incorporated company. It is difficult to understand how a body corporate thus created by statue can
lose its individuality by issuing the bulk of its capital to one person. The company is a law a different
person altogether from the subscribers of the memorandum and though it may be that after
incorporation the business is precisely the same as before, the same persons are managers, and the
same hands receive the profits, the company is not in law their agent or trustee. The stature enacts
nothing as to the extended or degree of interest which may be held by each of the seven or as to the
proportion of interest, or influence possessed by one or a majority of the shareholders over others.
There is nothing in the Act requiring that they or any of them should take a substantial interest in
the undertakings, or that they should have a mind or will of their own, or that there should be
anything like a balance of power in the constitution of company.
The verdict in this case has time and again reinforced the fact that the company is separate from its
members and has an existence of its own even though the company may have members or
directors of the same family or are the same persons.